A consumer proposal is one of Canada’s best solutions for dealing with debt.
If your bills are too much to handle and you’re looking for an easier way to pay off debt without filing for bankruptcy, a consumer proposal may be for you.
In this guide to consumer proposals, we tell you what you need to know to determine if a consumer proposal may be a good option for you.
Table of Contents
What Is A Consumer Proposal?
A consumer proposal is a legally binding debt settlement agreement, filed with a Licensed Insolvency Trustee, to repay your creditors a percentage of what you owe in exchange for full debt forgiveness.
If you are struggling with monthly debt payments, a consumer proposal plan provides debt relief while avoiding bankruptcy.
Becoming more popular, Canadians now chose a consumer proposal more often than bankruptcy as a way out of debt. In 2020, two-thirds of all insolvencies in Canada were a consumer proposal.
Your payment terms are based on a negotiation between what your creditors expect to receive and what you can afford to repay. Acting as a consumer proposal administrator, your Licensed Insolvency Trustee will meet with you to review your financial situation and help you determine how much to offer.
Settlements of 30 cents on the dollar are not uncommon however every debt proposal is different. The cost of a consumer proposal and ultimate settlement amount depends upon your income and what you own. Every proposal to creditors is unique.
Proposal payments can be spread out over a maximum of 5 years and are interest free. In most cases, this can result in savings of as much as 70%-80%.
To compare possible payments in a consumer proposal with other options, try our consumer proposal calculator.
What Debts Are Included in a Consumer Proposal?
A consumer credit proposal deals with unsecured creditors and can eliminate almost all unsecured debts including:
- credit card debt,
- bank loans or personal loans,
- unsecured lines of credit,
- payday loans,
- outstanding bills and accounts in collection
- tax debts, and
- certain student loan debt.
Secured creditors: A consumer proposal does NOT affect secured debt including the mortgage on your principal residence or a secured car loan. As long as you maintain your monthly loan payments, a secured creditor cannot change the terms or conditions of an existing loan if you file a consumer proposal. If you are having difficulty paying for your home or car, talk with your trustee.
Student loans: If you have been out of school for seven years, you can include your student loan in your proposal. If you have not been out of school long enough, your trustee can help you decide if it is better to file now to eliminate other debt like credit card debt to improve your budget sufficiently to afford these payments, or to wait until the student loan limitation period expires.
CRA and tax obligation: Since a consumer proposal is a federal government program, it has jurisdiction over government debts including income tax debt, unpaid HST or GST tax payments, and payroll withholding taxes.
Payday loan cycle: Roughly 40% of our consumer proposal clients owe money to at least one payday lender, and many carry multiple loans. If you are struggling with high-interest debt, a consumer proposal can be a way to erase that debt and start fresh.
Advantages of Canada’s Consumer Proposal Plans
A consumer debt proposal is the only debt settlement program sanctioned by the Canadian government. This makes it a safer debt settlement solution than informal options through a debt consultant or credit consolidation company.
Since it is a legal procedure under the Bankruptcy & Insolvency Act, a consumer proposal is the only debt relief solution outside of bankruptcy that provides protection from creditor actions like a wage garnishment, CRA garnishment or creditor lawsuit. If you are having financial difficulties with accounts in collections or are in arrears on payments, a consumer proposal pr prevents creditors from continuing to pursue you for payment.
As the #1 alternative to filing bankruptcy a debt proposal provides several benefits over other debt relief options:
- Reduce your debts by up to 70%;
- Keep all your assets including any equity in your home;
- Consolidate debts into one, affordable, monthly payment;
- Freeze interest on your debts;
- Legally bind all creditors to your offer including payday lenders and the Canada Revenue Agency;
- Avoid bankruptcy;
- Stop calls from collection agencies and wage garnishments.
Why File a Consumer Proposal?
A consumer proposal is a debt relief option when other options to consolidate debt fail. You may not qualify for a debt consolidation loan and may not be able to afford a debt management plan. Of these alternatives, a consumer proposal is almost always the lowest cost option.
There are 3 main reasons why you might choose a consumer proposal to eliminate debt:
- To keep assets that you might otherwise have to forfeit in a bankruptcy such as equity in your home or an RESP.
- To avoid high surplus income payments. If you earn more than the government-mandated minimum threshold in a bankruptcy you will be required to make higher monthly bankruptcy payments. A proposal allows you to spread these payments over a longer time, reducing your monthly costs. Think of it like extending the term on your mortgage or loan to reduce your monthly payments, except that a proposal is also interest free.
- To repay what you can afford. Many people just don’t want to file bankruptcy. A proposal allows you to offer what you can afford to pay while still reducing your overall debt burden.
If you are facing severe financial difficulty and can no longer pay your bills, a consumer proposal can be a solution to your debt problems.
Eligibility: Who Can File a Consumer Proposal?
As a federally regulated program, proposals have specific requirements you must meet to qualify to file a consumer proposal in Canada:
- You must be able to afford to pay a portion of your debts;
- You must be insolvent, meaning your debts must be greater than the value of any assets you own, or you can no longer keep up with debt payments as they become due;
- Your unsecured debt must not exceed $250,000 (not including your mortgage);
- You must be a resident of Canada or have property in Canada.
Citizenship is not a requirement to file a consumer proposal. You can be a permanent resident or residing in Canada under a work permit or other immigration status.
If your income is high enough that you would be required to make high monthly surplus income payments and you want to avoid bankruptcy, a consumer proposal program may a good choice for you.
How Does a Consumer Proposal Affect Your Credit?
As with any repayment program, including a debt management plan, a consumer proposal will impact your credit rating for a short while.
A note will appear on your credit report when you file a consumer proposal. After completion, this note is removed by the credit bureaus:
- In the case of TransUnion the earlier of 3 years from completion or 6 years from the date you filed.
- Equifax has a similar policy however in practice they will remove the notice 3 years after completion.
Most clients see an improvement in their credit score shortly after completing the program, long before the notice is removed. If you have a lot of debt now, your credit rating may already be damaged by late payments, missed payments or high balances. Even if you have a good credit score, you may not be eligible for any new loans other than bad credit loans like payday loans because you have too much debt already.
Getting out of debt with a consumer proposal is often the first step to rebuilding credit. It eliminates existing unsecured debt, resetting your credit position and allowing you to build a new, and better, credit history. You can take steps during and after your proposal to improve your credit score and we will provide you with the know-how to rebuild your credit as part of the consumer proposal process.
In most cases, people are able to rebuild their score enough to obtain a low-interest loan or mortgage within two years of completion if they take the appropriate steps to rebuild.
How To Hire a Licensed Insolvency Trustee in Canada
In Canada, consumer proposals can only be filed with a Licensed Insolvency Trustee.
A credit counsellor or unlicensed debt consultant cannot legally provide consumer proposal services. All they can do is refer you to a trustee licensed by the federal government to provide insolvency and restructuring services. You do not need a referral to an LIT and you should never pay fees to an outside consultant to help you prepare any paperwork.
As a Licensed Insolvency Trustee, Hoyes Michalos is licensed to file consumer proposals.
- All consultations are free
- We will meet with you as often as you need
- We explain all your debt relief options
- We’ll find a solution you can afford
- We have a 99% acceptance rate for consumer proposals we file
Hoyes Michalos & Associates provides consumer proposal services in the following locations
Other service areas
We offer the convenience of phone and video-conferencing only services for the following additional areas. Many people find it advantageous to begin the initial consultation and debt assessment over the phone or by video. If you decide to file, you can sign and complete your paperwork electronically. Credit counselling sessions can also be completed through video conferencing, which eliminates the need to miss work or schedule a time to attend the office.
More about consumer proposals in Canada on our blog:
- Filing a joint consumer proposal with your spouse
- Consumer proposal issues when you are self-employed
- What is a registered consumer proposal?
Find out how to file a consumer proposal in Canada or contact us for a free consultation.